New Jersey Pensions Propose More Hedge Fund Investments

New Jersey’s public-pension managers are proposing more investment in hedge funds and distressed real estate to protect against risks in the bond market should U.S. interest rates rise.

The investment plan for the fiscal year that starts July 1 calls for 5 percent of pension assets in its risk-mitigation class, which includes hedge funds. The fund has 4.26 percent of its $77.1 billion portfolio in such investments.

The class that includes commodities and equity-related real estate would grow by 2.16 percent to 8.5 percent, according to the plan presented Wednesday to the State Investment Council. Global growth, with holdings in equities, emerging markets and venture capital, would drop 2.39 percent to 56.75 percent.

“I would describe these proposed changes more as tweaks,” Christopher McDonough, director of the state’s pension- investment division, said at the meeting in Trenton.

The Federal Reserve hasn’t raised interest rates in six years, and an increase as early as June would affect Treasuries and similar holdings and cut into earnings, McDonough said. It’s a good time to “take advantage of the volatility,” he said.

“Fixed income is not an attractive source of income,” Corey Amon, deputy investment director, told the council, which will vote on the proposals in May.

The pension fund, excluding the police and fire mortgages that are reported on a lag, returned 2.61 percent in February and 2.44 percent for the year that began July 1, according to a report released Wednesday.

The greatest gain for the fiscal year to date, 4.28 percent, was in the risk-mitigation class, to which the council is considering an allocation increase. The liquidity class, with cash equivalents and Treasury holdings that the division may lessen next year, was down .37 percent.